Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.

Friday, December 26, 2014

Twenty-five offshore bankers, lawyers and advisers have yet to answer U.S. Justice Department charges that they helped Americans evade taxes. Most live in Switzerland, where they remain off-limits to U.S. prosecutors because the country doesn’t extradite people for tax crimes. If they cross the border into another country, they risk arrest, and the U.S. charges have no expiration date.

* * * *

Weil’s compatriots were cheered by his court victory, with Geneva financial newspaper L’Agefi calling him a “national hero” of “remarkable courage.” His success may tempt others to take their chances with a jury or to plead guilty and help prosecutors in bids for leniency.

They include former employees of Switzerland’s top three wealth managers -- UBS, Credit Suisse Group AG (CSGN) and Julius Baer Group Ltd. (BAER) Just 10 days after Weil’s acquittal, Martin Dunki, a 66-year-old retired client adviser at Zurich-based Rahn & Bodmer Banquiers, a private bank established in 1750, was indicted on a charge of conspiring to help Americans hide hundreds of millions of dollars in offshore accounts.

* * * *

Making Deals

“Client advisers who committed egregious offenses are probably trying to cooperate and strike a deal with the Justice Department,” Patel said. “Bankers fear coming to the U.S. because the DOJ can detain them on arrival pending trial. Therefore, walking around freely in Switzerland may be a more appealing option, even if the charges remain unresolved.”

Stefan Buck, who was Bank Frey & Co.’s head of private banking, was indicted last year in New York. His lawyer filed a motion seeking bail without Buck’s first having to appear in a New York courtroom. Buck ultimately “wishes to leave the ‘safe haven’ of Switzerland to appear in a U.S. court to clear his name,” the filing said. Prosecutors oppose his bail motion, which is pending.

Josef Dorig, who founded a Swiss trust company after working 36 years at Credit Suisse, pleaded guilty in April, admitting he created phony structures to help clients cheat the IRS. Dorig, 72, cooperated with U.S. prosecutors and is slated for sentencing Jan. 16 in federal court in Alexandria, Virginia.

Probation Sought

In a pre-sentencing memorandum filed with the court, his lawyers said he deserves probation because he accepted responsibility and was not extraditable from Switzerland.“Mr. Dorig had absolutely no incentive to voluntarily enter the United States to answer the charges against him or cooperate with the government,” his lawyers wrote. “He easily could have stayed in Switzerland and lived the rest of his life peacefully and happily in his homeland. But he did not.”

The U.S. probe has benefited from voluntary disclosures by at least 45,000 taxpayers and more than 100 Swiss banks seeking to reduce penalties through non-prosecution agreements. Information passed to U.S. authorities contains thousands of employee names, according to Douglas Hornung, a Geneva-based lawyer who represents Swiss financial workers.

“Weil’s acquittal was far from good news for bank employees lower down the food chain,” Hornung [Douglas Hornung, a Geneva-based attorney] said. “After losing face in court in November, U.S. prosecutors will redouble their efforts to pursue smaller fish.”

The IRS has updated its list of Foreign Financial Institutions or Facilitators, here. One function of this list is to identify banks that the insided OVDP penalty rate increases to 50%. (See FAQ 7.2, here.)

Tuesday, December 23, 2014

Bloomberg has this article on prosecution of enablers: David Voreacos, Offshore Tax Crimes Scorecard: Bankers, Lawyers, Advisers (Bloomberg 12/22/14), here. The article has specifics on the enablers involved. The article starts with:

The U.S. Justice Department has a mixed record of success in prosecuting offshore bankers, lawyers and advisers accused of helping U.S. taxpayers cheat on their taxes.

Since 2008, the U.S. has charged 38 people, including bankers from Switzerland’s three top wealth managers -- UBS Group AG, Credit Suisse Group AG and Julius Baer Group Ltd.

On Nov. 3, federal jurors in Fort Lauderdale, Florida, acquitted Raoul Weil, the former head of wealth management for UBS, who was accused of conspiring to help thousands of U.S. clients use Swiss banking secrecy to evade taxes. Weil was the highest-ranking bank executive charged by the U.S.

Of the 38, 25 have yet to answer the charges in court, and most live in Switzerland. Seven pleaded guilty, two were convicted at trial, two await trial and two were acquitted, including Weil. Here are the cases:

DOJ Tax announced in a press release, here, that David Kalai and Nadav Kalai, tax return preparers, were convicted by a jury of one count of conspiracy to defraud the Internal Revenue Service (IRS) and two counts of willfully failing to file FBARs. Key excerpts are:

According to the second superseding indictment and evidence introduced at trial, David Kalai and Nadav Kalai were principals of United Revenue Service Inc. (URS), a tax preparation business with 12 offices located throughout the United States. David Kalai worked primarily at URS’s former headquarters in Newport Beach, California, and later at URS’s location in Costa Mesa, California. Nadav Kalai, who is David Kalai’s son, worked out of URS’s headquarters in Bethesda, Maryland, as well as the URS locations in Newport Beach and Costa Mesa. David Almog was the branch manager of the New York office of URS and supervised tax return preparers for URS’s East Coast locations.

* * * *

The second superseding indictment and the evidence introduced at trial established that the co-conspirators prepared false individual income tax returns that did not disclose the clients’ foreign financial accounts nor report the income earned from those accounts. In order to conceal the clients’ ownership and control of assets and to conceal the clients’ income from the IRS, the co-conspirators incorporated offshore companies in Belize and elsewhere and helped clients open secret bank accounts at the Luxembourg locations of two Israeli banks, Bank A and Bank B. Bank A is a large financial institution headquartered in Tel -Aviv, Israel, with branches worldwide. Bank B is a mid-size financial institution, also headquartered in Tel Aviv, with a presence on four continents.

As further proven at trial, the co-conspirators incorporated offshore companies in Belize and elsewhere to act as named account holders on the secret accounts at the Israeli banks. The co-conspirators then facilitated the transfer of client funds to the secret accounts and prepared and filed tax returns that falsely reported the money sent offshore as a false investment loss or a false business expense. The co-conspirators also failed to disclose the existence of, and the clients’ financial interest in and authority over, the secret accounts and caused the clients to fail to file FBARs with the U.S. Treasury. \

* * * *

The evidence at trial established that David Kalai and Nadav Kalai each failed to file FBARs for calendar years 2008 and 2009 concerning a foreign account held at Bank A in Luxembourg. The bank account was held in the name of a nominee corporation in Belize and held over $300,000.

I think the banks are Bank Leumi and Bank Hapoalim, both Israeli banks.

A major Israeli international bank admitted that it conspired to aid and assist U.S. taxpayers to prepare and present false tax returns to the Internal Revenue Service (IRS) by hiding income and assets in offshore bank accounts in Israel and elsewhere around the world. A deferred prosecution agreement between the Bank Leumi Group and the Department of Justice was filed today in the Central District of California that defers prosecution on a criminal information charging the bank with conspiracy to aid and assist in the preparation and presentation of false tax returns and other documents to the Internal Revenue Service. This unprecedented agreement marks the first time an Israeli bank has admitted to such criminal conduct which spanned over a 10 year period and included an array of services and products designed to keep U.S. taxpayer accounts concealed at Bank Leumi Group’s locations in Israel, Switzerland, Luxembourg and the United States.

The Bank Leumi Group’s parent company is Bank Leumi le-Israel, B.M. Bank Leumi le-Israel is one of Israel’s largest banks, with subsidiaries in seven countries and more than 13,000 employees. Other subsidiary banks entering into this deferred prosecution agreement include The Bank Leumi le-Israel Trust Company Ltd., the oldest and largest of all bank trust companies in Israel; Leumi Private Bank S.A., a Switzerland-based subsidiary; Bank Leumi (Luxembourg) S.A., a Luxembourg-based subsidiary; and Bank Leumi USA, a FDIC-insured, full-service commercial bank with offices in California, Florida, Illinois and New York.

According to documents filed in the case, to account for their criminal conduct, Bank Leumi Group will pay the United States a total of $270 million. Of this total payment, $157 million represents a penalty for U.S. taxpayer accounts held at Leumi Private Bank in Switzerland. This $157 million penalty is consistent with the department’s Swiss Bank Program, which permits certain Swiss Banks to avoid prosecution by making a full and complete disclosure of their U.S. taxpayer-held accounts and paying substantial penalties. The agreement further provides that Bank Leumi Luxembourg and Leumi Private Bank will cease to provide banking and investment services for all accounts held or beneficially owned by U.S. taxpayers.

* * * *

According to the filed statement of facts, from at least 2000 until early 2011, the Bank Leumi Group took affirmative and extensive steps to assist U.S. clients in concealing their assets offshore, including:

surreptiously sending private bankers from Israel and elsewhere around the world to the United States to meet secretly with U.S. clients at hotels, parks and coffee shops to discuss their offshore account activity;

assisting U.S. clients in using nominee corporate entities created in Belize and other foreign jurisdictions to hide their undeclared accounts by concealing the U.S. client as the true beneficial owner of the account;

using the Bank Leumi le-Israel Trust Company as a nominee account holder for U.S. clients with accounts in Israel to conceal the U.S. client as the true beneficial owner of the account;

maintaining U.S. clients’ undeclared offshore accounts under assumed names or numbered accounts to conceal the U.S. client as the true beneficial owner of the account;

providing hold mail services so that correspondence and other account information would not go directly to the U.S. client to make it more difficult to connect the client to the secret offshore account;

extending loans to U.S. clients from Bank Leumi USA that were collateralized by the assets in those clients’ offshore accounts, so that the clients could leverage their offshore assets to obtain and use capital in the United States while keeping their foreign accounts secret and undetected from the U.S. government; and

after the department’s investigation into UBS and other Swiss banks’ criminal conduct in aiding U.S. taxpayers to evade their taxes became public, the Bank Leumi Group opened and maintained accounts for U.S. taxpayers who left UBS and other Swiss banks due to the investigation in an effort to continue to avoid detection by the U.S. government.

* * * *

According to documents filed in the case, as part of its agreement with the department, the Bank Leumi Group provided the names of more than 1,500 of its U.S. account holders. As part of the agreement, the Bank Leumi Group will continue to disclose information to the government regarding its cross-border business and provide testimony and information regarding other investigations.

Friday, December 19, 2014

USAO SDNY has issued a press release titled "Court Authorizes Irs To Issue Summonses For Records Relating To U.S. Taxpayers Who Used Services Of Sovereign Management & Legal, Ltd., To Conceal Offshore Accounts, Assets, Or Entities", here. The JDS Order was signed yesterday by the judge in SDNY. Key excerpts:

In this action, the Court granted the IRS permission to serve what are known as “John Doe” summonses on FedEx Express, FedEx Ground, DHL, UPS, Western Union, the FRBNY, Clearing House, and HSBC USA. The IRS uses John Doe summonses to obtain information about possible tax fraud by individuals whose identities are unknown. The John Doe summonses direct these eight entities to produce records that will assist the IRS in identifying U.S. taxpayers who, from the years 2005 through 2013, used Sovereign’s services to establish, maintain, operate, or control any foreign financial account or other assets; any foreign corporation, company, trust, foundation or other legal entity; or any foreign or domestic financial account in the name of such foreign entity.

* * * *\

Sovereign is a multi-jurisdictional offshore services provider that offers clients, among other things, the formation and administration of anonymous corporations and foundations in Panama as well as offshore entities. Related services provided by Sovereign include the maintenance and operation of offshore structures, mail forwarding, the availability of virtual offices, re-invoicing, and the provision of professional managers who appoint themselves directors of the client’s entity while the client maintains ultimate control over the assets.

As a result of a DEA investigation of online narcotics trafficking known as OPERATION ADAM BOMB, the IRS learned that Sovereign was involved in assisting U.S. clients with tax evasion. During the IRS’s investigation of Sovereign’s conduct, one taxpayer, making a voluntary disclosure of tax non-compliance to avoid prosecution, reported that Sovereign helped the taxpayer form an anonymous corporation in Panama that the taxpayer used to control assets without appearing to own them.

The IRS investigation also determined that Sovereign uses Federal Express, UPS, and DHL to correspond with U.S. clients, and Western Union to transmit funds to and from clients in the U.S. In addition, the IRS learned that the wire services operated by the FRBNY and Clearing House, and the U.S. correspondent bank accounts that HSBC USA holds for Sovereign’s banks in Panama and Hong Kong, are likely to have records of financial transactions between Sovereign and its clients in the U.S. By obtaining information from these entities through John Doe summonses, the IRS expects to be able to identify Sovereign’s U.S. clients who may be avoiding or evading taxes.

I infer from this action that the US for some reason is unable to blast this information out of Sovereign.

From the multiple John Doe Summonsees and the likely considerable effort to follow the leads that will be generated, it would appear that the Government believes Sovereign is a major enabler in offshore evasion.

USAO NDGA announced here the guilty plea for Gregg A. Kaminsky. The following are the key excerpts from the press release:

Kaminsky is an Internet entrepreneur who serves as the Chief Executive Officer of Circlenet LLC, based in Atlanta, Ga. From 2000 through 2008, Kaminsky owned and controlled a foreign bank account with Union Bank of Switzerland AG (“UBS”), one of the biggest banks in Switzerland and largest wealth managers in the world. By 2006, Kaminsky’s UBS account held approximately $1.1 million. From time to time between 2002 and 2009, Kaminsky caused funds to be wire-transferred from his UBS account in Switzerland to other foreign bank accounts controlled by him in Thailand and Hong Kong. Also during that time, Kaminsky caused his income from at least two different U.S. companies to be direct-deposited into his UBS account in Switzerland.
Yet, over this period, Kaminsky did not disclose his UBS account or other foreign financial accounts to the U. S. Treasury Department as required, and thereby concealed several hundred thousand dollars in taxable income, interest, and dividends from the U.S. Internal Revenue Service (IRS).

In addition, in 2007 and 2008, Kaminsky omitted his UBS account and associated income from Free Applications for Federal Student Aid (FASFA) that he electronically filed with the U.S. Department of Education in order to qualify for need-based federal financial aid assistance to fund his tuition for an Executive MBA program at Emory University. At the time of the FASFA applications, Kaminsky controlled over a half million dollars in his UBS account, which would have made him ineligible for federal student loan assistance.

On June 30, 2008, the U.S. Department of Justice sought court approval to compel UBS to disclose the identities of U.S. accountholders who may be using UBS accounts to hide assets overseas and thereby evade U.S. taxes. The request and the order authorizing it were widely reported by the media throughout the United States, which coverage continued throughout 2008 and 2009 as the U.S., UBS, and Switzerland negotiated a resolution and UBS began disclosing U.S. account holders to the IRS.

Following this news, Kaminsky closed his UBS account and transferred the balance of his UBS account to an account that he controlled at HSBC Bank in Hong Kong. Further, in spring 2010, Kaminsky filed FBARs for his Swiss and Hong Kong accounts for the very first time, also filing amended individual income tax returns for 2007 and 2008 that disclosed the previously unreported income in his UBS account. However, in his amended 2007 and 2008 returns, and in his subsequently filed returns for 2009 through 2011, Kaminsky still failed to report nearly $150,000 in taxable income earned from his business activities in the virtual world, “Second Life.”

I recently blogged on United States v. Miner, 774 F.3d 336 (6th Cir. 2014), here. The blog entry is Sixth Circuit Holds that § 7212(a)'s Omnibus Clause Requires Knowledge of a Pending Proceeding / Action and Intent to Obstruct (Federal Tax Crimes Blog 12/13/14), here. In Miner, the Sixth Circuit said that its decision in United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998), holding that a pending IRS proceeding was required was the applicable precedent in the Sixth Circuit, despite a case after Kassouf, United States v. Bowman, 173 F.3d 595 (6th Cir. 1999), which stated, suggested or even held otherwise. The issue has arisen in another case in another circuit with a different outcome at the trial level.

allegedly defrauded both the Internal Revenue Service ("IRS") and clients of "02HR," a professional employer organization, by directing 02HR to fail to pay to the IRS and to insurance companies $58 million in funds provided to 02HR by clients to cover their tax and insurance obligations.

For that conduct, he was charged with wire fraud, tax evasion and tax obstruction. I focus on the tax obstruction charge in a single count, Count 7, the same charge involved in Miner, Kassouf and Bowman. I cut and paste immediately below the Court's entire discussion of the issue:

III. Count Seven

Count Seven charges Huff with corruptly endeavoring to obstruct and impede the due administration of the tax laws by causing 02HR employees to, inter alia, file false Forms 941, cease filing Forms 941, cease making payments to the IRS, divert funds intended for the IRS, and conceal from 02HR's clients its failure to make payments to the IRS, in violation of 26 U.S.C. § 7212. Indictment ¶ 21. Extrapolating from cases successful prosecutions under Section 7212, Huff argues that a conviction under this provision requires "proof of a scheme [either] to conceal income or to impede an IRS investigation or proceeding, neither of which is alleged in the Indictment." Def's Reply at 18-19.

Huff is correct that it is difficult to find cases in which defendants have been convicted under Section 7212 without either impeding an IRS proceeding or, more often, concealing their own income. However, the mere lack of cases falling outside this dichotomy does not transform the two precedential patterns into statutory requirements.

First, courts have found that the "omnibus clause" under which Huff has been charged is, as its title implies, subject to an expansive interpretation. See United States v. Kelly, 147 F.3d 172, 176 (2d Cir. 1998) (noting that "the second or 'omnibus' clause is not so limited, and renders criminal 'any other' action which serves to obstruct or impede the due administration of the revenue laws" and that "the plain language of section 7212 does not support [a] narrow interpretation of the statute").

Thursday, December 18, 2014

In Muncy v. Commissioner, T.C. Memo. 2014-251, here, the Tax Court addressed the procedures with respect to the new immediate assessment of restitution orders. I cite prior blog entries below with more detail about these new statutory procedures. Suffice it to say that the problem at which the new immediate assessment procedures are addressed may be illustrated as follows:

Assume a criminal tax crime sentencing where the judge is authorized by plea agreement to order tax restitution of $100,000. At least in theory, that ought to be the criminal tax number provable by a preponderance of the evidence. (Sometimes called in other settings, the tax deficiency, tax due and owing and tax evaded; in a criminal sentencing it might often be the same as the tax loss driving the guidelines calculations, but may not be the same.) Assume further that the real civil tax liability for the years of conviction and thus years of restitution is $200,000. The extra $100,000 is the amount which the Government did not prove was tax evaded and thus could / should not be in the order of restitution. (OK, I know that in plea agreements the Government might negotiate for higher tax restitution than it might otherwise be able to prove at sentencing, but stick with me on this.)

Under the old procedure, the sentencing court would order restitution. The IRS would then issue a notice of deficiency for $200,000. That is the deficiency amount, although $100,000 of that aggregate deficiency is the same liability as for restitution. Since the IRS must proceed for the entire amount by notice of deficiency, the prohibitions in assessment for the entire amount apply and, until the IRS assesses after those prohibitions expire or are waived by the taxpayer, the IRS cannot use the IRS collection tools. Of course, the taxpayer does have an order of restitution, so the Government can use restitution collection tools -- not as efficient as IRS collection tools.

The new legislation (see blog entries below) permit the IRS to assess the amount of the tax restitution immediately without the necessity of a notice of deficiency and the delays attendant to the prohibition on assessment in Section 6213.

So, assume these new procedures apply to this example. The IRS can immediately assess $100,000. That means that the unassessed liability (the civil liability remaining after consideration of the assessed restitution) is $100,000. The IRS still has to go through its deficiency notice procedures. But, the issue in Muncy is what the amount is that the IRS should assert in the deficiency notice. Keep in mind that, as compelled by the new statutory procedure, the IRS has already assessed the $100,000 representing the tax restitution. Hence, from a liability standpoint, the only amount unassessed is the remaining $100,000 (the civil liability unassessed).

In Muncy, after going through various statutory interpretation contortions, the Tax Court held (as I understand it), that the deficiency is still $200,000 (including the $100,000 already assessed under the new procedures). So, once the Tax Court approves that deficiency amount, the IRS will assess the entire $200,000 which will be in addition to the $100,000 assessed under the new procedures. So the aggregate assessed liability is $300,000 when, in fact, the real liability is $200,000. (I suppose that the IRS could credit the amount already assessed and have a new assessment of $100,000 which is $100,000 less than the deficiency determined by the Tax Court.

A recent Tax Notes Today article reports on the Criminal Fraud and Tax Controversy Conference in Las Vegas, sponsored by the American Bar Association Section of Taxation. Ajay Gupta, Offshore Enforcement to Remain Top Priority in 2015, 2014 TNT 240-6 (12/13/14), no link available. Here are some key points from the article:

2. On the Streamlined program, David Horton LB&I director for international compliance, said that there are differences between the OVDP and Streamlined, particularly noting to Streamlined "requires a certification of non-willfulness, and a false certification could lead to possible criminal liability."

3. On the certification statement of reasons for noncompliance, Horton said that a "conclusory statement" will not suffice and that there is not a "checklist on willfulness."

4. "He ]Horton] warned of 'a lot more John Doe summonses' in the next 12 to 24 months, in other parts of the world and 'beyond banks.' The focus will be on intermediaries, he said, referring to those who promoted or facilitated transactions for stashing money abroad."

5. John McDougal, IRS special trial attorney, a major IRS player in the offshore initiative, noted that, unlike UBS, "most foreign financial institutions don't have a presence in the United States," thus requiring that Agents "piece together a picture of evasion based on records of transactions in correspondent banks."

6. Horton indicated that the IRS was aware of but did not have a current solution for the difficulty and delay of U.S. citizens abroad most of their lives not have as SSN and unable to get one in a decent time period, thus delaying their OVDP or Streamlined.

Non-Offshore

7. Away from the offshore initiative, identify theft is "the leading concern.

8. Anecdotally, a prosecutor from the Los Angeles area said that IRS CI was focusing on cybercrimes, transactions in bitcoin and transactions on "on eBay and other online-only businesses."

JAT Note: I used to attend this conference when it was in San Francisco, where I have daughter, son-in-law and grandchildren. I have no such connection in Las Vegas or other interest in going to that venue.

Dave Wolf reports on this firm's site the following: Foreign Clients of Israeli Banks Are Asked to Prove Tax Compliance in Home Country (12/18/14), here. Excerpts:

The Bank of Israel recently sent Israeli banks a draft procedure requiring banks to receive from their foreign clients a declaration that they have paid the required tax on the income in their Israeli bank accounts in their country of residence.

In general, under the draft legislation, the procedure requires that every foreign resident customer (both new and existing ones) will have to present data about the source of their wealth and income, and declare that he has paid the legally required taxes in their country of residence. In addition, the client is required to sign a consent to waive their right to bank secrecy with respect to any other banking jurisdiction.

The Bank of Israel also allows the banks not to open an account for foreign residents who do not provide all the required data and to freeze an account or refuse banking services in cases that expose the bank to the risk of violating overseas law.

The banks have been forced to require such declarations from their US customers already as part of implementation of the FATCA rules.

Note that, as presented, it requires the declaration only for the country of residence and does not require the declaration for the country of citizenship. Strange.

Addendum 11/20/14 9:30 AM:

A reader emailed me to state that the requirement for information about residence only is not strange because most countries tax by residence. Of course, Israel is well aware that the U.S. taxes noncitzens by residence and citizens by citizenship. Here was my response to the reader (as slightly modified to present here).

I knew that most countries tax on residence – at least that is what the posters of comments say. But, if the bank is asking for place of residence it would seem it could have asked also for place of citizenship and enter that information in each bank's database. Pretty simple one to add (might have to have multiple citizenship fields (relational database with one (the name) and many (the citizenship fields)). Pretty easy database tweaking. (Note also that, depending on definition of residence, can have multiple residences as well and that can be handled easy in a relational database.) But, if the bank doesn't ask for the raw data and the bank thereafter realizes that it should have asked about citizenship as well, then it is a ton of trouble to gather that additional data. Particularly when it could have been acquired the first time and easily input.

The FBI Press issued a press release titled Former Bechtel Executive Pleads Guilty in Connection with a $5.2 Million Kickback Scheme (12/4/14), here. The case is principally a nontax case, but in the excerpts below, I highlight the tax charge:

The former Principal Vice President of Bechtel Corporation and General Manager of the Power Generation Engineering and Services Company (PGESCo) pleaded guilty today in connection with a $5.2 million kickback scheme intended to manipulate the competitive bidding process for state-run power contracts in Egypt.

* * * *

In his plea agreement, Elgawhary admitted that, from 1996 to 2011, he was assigned by Bechtel – a U.S. corporation engaged in engineering, construction and project management – to be the general manager at PGESCo, a joint venture between Bechtel and Egypt’s state-owned and state-controlled electricity company (EEHC). PGESCo assisted EEHC in identifying possible subcontractors, soliciting bids and awarding contracts to perform power projects for EEHC. Elgawhary admitted to accepting a total of $5.2 million from three power companies, which they paid to secure a competitive and unfair advantage in the bidding process. According to court documents, the power companies and their consultants paid more than $5.2 million in kickback payments into various off-shore bank accounts under the control of Elgawhary, including various Swiss bank accounts.

As Elgawhary admitted in his plea agreement, he attempted to conceal the kickback scheme by routing the payments through various off-shore bank accounts, including Swiss bank accounts, under his control. Elgawhary also sent various documents and “Representation Letters” to Bechtel executives and members of the PGESCo Board of Directors in Maryland, falsely certifying that he had no knowledge of any fraud or suspected fraud at PGESCo, and that there were no violations or possible violations of law or regulations that should have been considered for disclosure in PGESCo’s financial statements. Elgawhary also admitted that, in further attempt to conceal the scheme, he made misrepresentations to counsel for Bechtel when he was interviewed in April 2011.

Elgawhary also admitted to conspiring to launder the proceeds of the scheme and to obstructing and impeding the administration of U.S. tax laws by falsely claiming that he maintained only one foreign bank account, denying that he received any income from a foreign bank account, and failing to report any of the kickback payments as income for the tax years 2008 through 2011.

* * * *

The case is being investigated by the FBI’s Baltimore Division and IRS-CI’s Washington D.C. Field Office. Significant assistance was provided by the Criminal Division’s Office of International Affairs, and law enforcement counterparts in Switzerland, Germany, Italy, Saudi Arabia and Cyprus.

I previously reported on the charges in Corporate Corruption Case Charged With Swiss Bank Accounts to Hide the Loot (Federal Tax Crimes Blog 2/10/14), here. As I noted there, it is not clear why the charges did not cover FBAR violations, but, of course, the Government has a veritable smörgåsbord of charges that it can make in this type of fact pattern. More charges will not have a great effect on sentencing or on the message sent from the prosecution and conviction and would likely be viewed as piling on. Note also that the tax perjury charge apparently did not indicate that there was a pending investigation that was the object of the obstruction. See Sixth Circuit Holds that § 7212(a)'s Omnibus Clause Requires Knowledge of a Pending Proceeding / Action and Intent to Obstruct (Federal Tax Crimes Blog 12/13/14), here.

Thousands of rich Australians have come forward to declare billions of dollars in untaxed assets and income stashed in bank accounts in Switzerland and in other countries.

The rush comes as what the Australian Taxation office says is the last tax amnesty it will ever offer comes to an end.

In a warning to anyone feeling reluctant to come forward, ATO said it has an "informer" who has already handed them a list of 122 Australians with Swiss bank accounts.To date, 1750 Australians have declared a total of $240 million in income and $1.7 billion in assets under the amnesty and another 800 expected to make voluntary disclosures.

* * * *

The Tax Office is also using powers offered under Australia's new treaty with Switzerland to request information from Swiss authorities to help them gather a case against five rich people that the ATO suspect have hidden income and assets offshore but who have not been cooperating.

* * * *

Switzerland proved to be the most popular destination for undeclared wealth (585 individual disclosures were made about money and assets hidden there), followed by the UK (299 disclosures), Israel (231 disclosures), Singapore (123 disclosures), Hong Kong (115 disclosures) and Liechtenstein (43 disclosures).

* * * *

Mr Cranston confirmed that most of the people who had come forward were the children and grandchildren of rich migrants families.

They had been left to clean up tax messes inherited from their migrant parents and grandparents, who upon migrating to Australia in the 1950s and 1960s, had stashed money away in secret Swiss bank accounts - a practice that was common at the time."It's a clean-up exercise of the past," Mr Cranston said.

The majority of those involved are wealthy Australians, classified by the Tax Office as having with net assets greater than $5 million, and high-wealth individuals with net assets worth more than $30 million.

The amnesty, which was first revealed in January and officially announced by the Tax Office in March, gives reduced penalties and caps penalties back on to four years, not the entire time money and assets have been hidden. Those making voluntary disclosures have also been given an assurance that they will not be investigated or referred for criminal investigation on the basis of that information.

Initially taxpayers that were caught up in official ATO audits were prohibited from participating in the amnesty, dubbed by the agency as "Project Do It".

But "we've allowed a couple in for various reasons because the audit was on small minor matter and had nothing to do with ...international arrangements," Mr Cranston said.ATO assistant commissioner, international, David Allen, said a recently updated treaty with the Swiss had greatly increased their powers to hunt down individuals dodging tax.

On top of this, the OECD and G20 are working on a common reporting standard that will see information held by banks and other financial institutions shared between tax authorities.

Mr Allen said the Tax Office would be undertaking its first information exchange with Swiss authorities under the new treaty on December 22nd, just days after the amnesty closes (on December 19).

"That first request is about a series of (five) high-wealth individuals that have we have concerns about and that we suspect may have a Swiss bank account," he said.

"We also have an informer via a treaty country that has given us a list of Australians with Swiss bank accounts. There's 122 names on the list. This is significant as its first time we've made a request for information and we are confident that they [Swiss authorities] will supply the information that we need. This is not a fishing expedition."He said the agency had also separately been given information

Leumi, Israel's second largest bank, expects to pay 1.4 billion shekels ($355 million) to settle a U.S. investigation into whether it helped American clients evade taxes, mainly through its private bank in Switzerland.

The process is expected to be completed by the middle of January 2015, if not by the end of this year, Leumi's legal adviser Hanan Friedman told parliament's economics committee on Wednesday, according to a statement from the committee.

A source told Reuters last week that Leumi would likely pay $270 million to the U.S. government and another $130 million to New York State's Department of Financial Services (DFS), which regulates certain banks in the state.

* * * *

"After the (Leumi) investigation is completed, we will examine ... the responsibility of the bank's managers," David Zaken, Israel's banking regulator, told the panel.

Financial daily Calcalist reported on Wednesday that as part of the final settlement Leumi's U.S. activities will be supervised by U.S. regulators. The bank has started the process of transferring client assets in its Swiss private banking business to Julius Baer.

With international banking secrecy on the verge of being wiped out, pressure is mounting to give Swiss tax authorities the power to force banks to hand over data in cases of suspected tax evasion by Swiss citizens.

Although the government has bowed to international pressure and committed to the automatic exchange of information with foreign tax authorities from 2017, the Swiss still have the option of keeping their bank account information secret from the Swiss tax office.

“Foreign tax authorities can access any and all information concerning their citizens from Swiss tax authorities, while these same authorities remain bound and gagged in the face of their own tax evaders,” says Jean-Christian Lambelet, professor emeritus of economics at the University of Lausanne. “It’s obvious that this two-speed system is not tenable.”

Lambelet’s opinion is widely shared by banking and finance experts canvassed by swissinfo.ch.

“It’s just a question of time. Banking secrecy is obsolete, it wronged us. To keep it uniquely for the Swiss would send the wrong signal to the rest of the world,” says finance consultant Daniel Spitz.

Aware of the problem, finance minister Eveline Widmer-Schlumpf has been trying since 2010 to inject more transparency into Switzerland’s taxation system. Notably, criminal tax law has been revised to allow for severe penalties for tax offences, including for tax evasion – defined in Switzerland as “forgetting” to declare revenues or fortunes.Convincing the Swiss

Chasing down tax evaders would enable the government to compensate in part for lost revenue due to the Corporate Tax Reform III that will end tax privileges for foreign multinationals.

For the cantons, a number of which are experiencing budget difficulties, chasing tax dodgers could deliver a much-needed boost to the state finances.

“It’s essential that the tax office is given more powers so that it can investigate suspected cases of fraud,” says Georges Godel, finance minister for canton Fribourg.

But resistance is fierce. Having received a drubbing during the consultation process, the government has already backed down on some key issues. The final proposal, which will be delivered at the end of 2015, will not authorise the cantons to gain access easily to the banking data of people suspected of hiding their revenue.

Wednesday, December 17, 2014

In United States v. Taylor, 2014 U.S. App. LEXIS 22674 (6th Cir. 2014) (unpublished), here, the Sixth Circuit held that the trial court's failure to instruct the jury with the standard Cheek formula for the willfulness element -- the voluntary, intentional violation of a known legal duty -- because there was no plain error requiring reversal since he did not object at the trial level. Here is the Court's entire discussion:

Next, Taylor contends that the district court erroneously instructed the jury regarding § 7206(1)'s requirement that a defendant act "[w]illfully." We agree with Taylor that the instruction in question is somewhat incomplete. The district court instructed the jury that "[t]he term willfully, as used in these instructions to describe the defendant's state of mind, means that he knowingly performed an act deliberately and intentionally as contrasted with accidentally, carelessly or unintentionally." Missing from its explication of the pertinent standard is the longstanding recognition that § 7206(1)'s willfulness requirement obligates the government to prove the defendant's "voluntary, intentional violation of a known legal duty." Cheek v. United States, 498 U.S. 192, 201 (1991); see United States v. Pomponio, 429 U.S. 10, 12 (1976).

Nevertheless, Taylor concedes that, because he made no objection at trial to the instruction in question, our review is only for plain error. See Knowles, 623 F.3d at 385. This requires a showing of (1) error (2) that is plain, (3) that affects substantial rights, and (4) that "seriously affects the fairness, integrity, or public reputation of judicial proceedings" such that we should exercise our discretion to correct it. United States v. Miller, 734 F.3d 530, 536-37 (6th Cir. 2013) (citation omitted). Even assuming that an error is "plain," a defendant's substantial rights ordinarily are affected only if the error was "prejudicial"; that is, if it "affected the outcome of the district court proceedings." United States v. Olano, 507 U.S. 725, 734 (1993). And unlike under a typical harmless error analysis, see O'Neal v. McAninch, 513 U.S. 432, 437-38 (1995), the party seeking relief on the basis of plain error bears "[t]he burden of persuasion [*8] . . . to make a specific showing of prejudice." United States v. Jones, 108 F.3d 668, 672 (6th Cir. 1997) (en banc).

Taylor has made no such showing. We have observed that a willfulness instruction is the inverse of an instruction on a good-faith defense, see United States v. Damra, 621 F.3d 474, 502 (6th Cir. 2010), and Taylor argues only that the district court's instruction improperly failed to require the jury to decide whether he acted in good faith in failing to report as income the funds that he obtained from his investors. But the remaining elements of § 7206(1), unlike those of many other criminal tax statutes, see, e.g., 26 U.S.C. §§ 7201, 7203; Cheek, 498 U.S. at 193-94, overlap in significant ways with the tax code's generally applicable willfulness requirement because they require a finding regarding the defendant's subjective beliefs. See United States v. Tarwater, 308 F.3d 494, 506 (6th Cir. 2002) (characterizing § 7206(1) as a "perjury statute"). Even under the district court's partially incomplete instruction, the jury was permitted to convict Taylor only after it found that he "deliberately and intentionally" filed tax documents that he did "not believe to be true and correct as to every material matter." 26 U.S.C. § 7206(1). In other words, even absent the willfulness requirement, the jury in convicting Taylor needed to find that he knew and believed that his income was reportable before it could find that he purposefully filed tax forms that he subjectively believed were materially false.

As a result, Taylor's argument rings hollow when he claims that the result of his trial would have been different if the jury had been more precisely instructed. After all, in finding him guilty even under the incomplete instruction, the jury necessarily rejected Taylor's assertion that he subjectively believed that he did not need to report the income in question to the IRS. The jury found that Taylor knew that he was providing materially false information to the IRS but did it anyway. Thus, for the proper jury instruction to have made a difference in Taylor's case, the jury would have had to accept his argument that he in good faith did not know that it was unlawful for him to deliberately lie to the IRS about a material tax matter.

Caplin & Drysdale, a major player in the offshore account saga, has this new posting, titled "Switzerland Narrows Advance Notice to Account Holders of Treaty Requests: Americans with Unreported Accounts Impacted," here. I encourage readers having an interest in the issue to read the entire posting, but here is a bottom-line for those U.S. taxpayers still not making affirmative choices about their otherwise unreported Swiss accounts:

Americans can no longer count on being warned beforehand that information about a Swiss account might be provided to the IRS or the U.S. Justice Department ("DOJ"). By the time notice is given, it may well be too late for the account holder to make a voluntary disclosure.

The article notes that, pursuant to the DOJ Program for Swiss Banks the DOJ and, of course, the IRS will be receiving aggregate data from the banks that will permit "group" requests -- I call them John Doe requests because they function like John Doe summons and subpoenas -- to be made under the exchange of information provision of the double tax treaty, with the Swiss competent authority and the banks then being required to identify the taxpayers within the group (scope of the characteristics in the request).

Saturday, December 13, 2014

Section 7212(a), here, was derived from Title 18’s obstruction provisions. The key Title 18 obstruction provision is § 1503, here. Both of the sections have an Omnibus Clause providing:

18 USC § 1503:

corruptly influences, obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice.

26 USC 7212(a)

corruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title.

In United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998), here, the Sixth Circuit noted that the Omnibus Clause in § 7212(a) and the Omnibus Clause in § 1503 were virtually identical and thus held that the Supreme Court's interpretation of § 1503 in United States v. Aguilar, 515 U.S. 593 (1995), here, to require that the defendant know of a pending investigation that he intended to obstruct applied to § 7212(a) as well. Just as this interpretation restricts the application of the same words in the Omnibus Clause of § 1503, so this interpretation of the same words restricts the application of the words in the Omnibus Clause of § 7212(a). Subsequently in United States v. Bowman, 173 F.3d 595 (6th Cir. 1999), here, the Sixth Circuit restricted Kassouf to its facts and applied § 7212(a)’s Omnibus Clause where the defendant, by filing information forms, attempted to trick the IRS into investigating his creditors. Bowman could be read as a repudiation of Kassouf’s requirement for a pending investigation and thus giving a broader interpretation to § 7212(a)’s Omnibus Clause than to § 1503’s Omnibus Clause. United States v. Floyd, 740 F.3d 22, 32 n4 (1st Cir. 2014); United States v. Kelly, 564 F. Supp. 2d, 843, 844-45 (N.D. Ill. 2008)}}; and United States v. Willner, 2007 U.S. Dist. LEXIS 75597 (S.D.N.Y. 2007) (finding support in the defraud conspiracy interpretation).

On December 12, 2014, the Sixth Circuit in United States v. Miner, 774 F.3d 336 (6th Cir. 2014), here, held that Bowman did not change the requirement it announced in Kassouf that the conduct must be intended to obstruct an IRS investigation. Significant to the Court’s decision was its Circuit authority that the first decision trumps a later decision that might be viewed as in conflict. The Court made much of the point that the Government’s sweeping claims that the Omnibus Clause untethered to a pending proceeding were expressly considered and rejected in Aguilar and Kassouf, the precedential authority in the Sixth Circuit. The Court concluded:

In summary, post-Kassouf and post-Bowman, a defendant may not be convicted under the omnibus clause unless he is "acting in response to some pending IRS action of which [he is] aware." McBride, 362 F.3d at 372 [United States v. McBride, 362 F.3d 360 (6th Cir. 2004), here] (internal quotation marks omitted). The extension of Bowman that is urged by the government in this case does not represent a path that was unconsidered by Kassouf; it represents the path that was not taken.

Monday, December 1, 2014

In Ratzlaf v. United States, 510 U.S. 135 (1994), here, the Supreme Court addressed the willfulness requirement in the BSA's criminal penalty for structuring. The syllabus thus says that willfulness requires that "the Government must prove that the defendant acted with knowledge that the structuring he or she undertook was unlawful, not simply that the defendant's purpose was to circumvent a bank's reporting obligation." Then, in the conclusion of the opinion, the Court held that "the jury had to find he knew the structuring in which he engaged was unlawful." (p. 149)

Ratzlaf means that for a jury to find willfulness for structuring, the Government must prove each of the following: (i) the defendant knew of the legal duty not to structure, (ii) the defendant intended to violate that known legal duty, and (iii) the defendant knew that it was a crime to intentionally violate that known legal duty.

Congress changed the structuring statute shortly after the Ratzlaf decision to eliminate the willfully element for structuring. See § 5324(a), here (as amended); the pre-amendment statute is quoted in Ratzlaf; see also USAM Criminal Resource Manual 2033, Structuring, here. After, the amendment, all that is required for conviction for structuring is (i) the defendant knew of the legal duty not to structure, and (ii) the defendant intended to violate that known legal duty. The defendant need not know that it was a crime to violate that known legal duty.

The question I raise here is whether the civil FBAR willful penalty in Section 5321(a)(5), here, requires that key third element that the Supreme Court so clearly held in Ratzlaf was required by the term willfully in that sister BSA provision, Section 5324 (prior to amendment for structuring only). Ratzlaf seems to answer that question:

A term appearing in several places in a statutory text is generally read the same way each time it appears. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479 (1992). We have even stronger cause to construe a single formulation, here § 5322(a), the same way each time it is called into play. See United States v. Aversa, 984 F.2d 493, 498 (CA1 1993) (en banc) ("Ascribing various meanings to a single iteration of [§ 5322(a)'s willfulness requirement] — reading the word differently for each code section to which it applies — would open Pandora's jar. If courts can render meaning so malleable, the usefulness of a single penalty provision for a group of related code sections will be eviscerated and . . . almost any code section that references a group of other code sections would become susceptible to individuated interpretation.").

I suppose that one could argue that perhaps the Ratzlaf element (iii) is not required because the FBAR willful penalty is a civil penalty rather than a criminal penalty as involved in Ratzlaf. I don't see how that can change the meaning of the same word "willfully" simply because there is a civil penalty with the same textual requirements of the criminal penalty. (In this regard, the mens rea required for the Section 6663 civil fraud penalty is the same as the tax crimes willfully element (often not worded crisply as intent to violate a known legal duty, but meaning that in practical effect) [I will post authority on this tomorrow]; the only practical difference is in the burden of proof.)